Euro area headline inflation rose from 1.9% year on year in February to 3.0% year on year in April. The change was linked to higher Brent crude prices feeding through to fuel costs.
Fuel prices were estimated to have added about 1.1 percentage points to headline inflation since February. Under a baseline scenario in which the Strait of Hormuz reopens within weeks, the fuel effect was expected to have peaked in April.
Inflation Outlook Through 2027
Headline inflation in April reached its highest level since late 2023 at 3%. Indirect and second-round effects were expected to lift headline inflation towards about 3.5% in early 2027.
Those effects were also expected to raise core inflation, with a peak of around 2.6% year on year in early 2027. The outlook was linked to population ageing, German fiscal stimulus, and uncertainty related to risks in the Middle East.
A larger downturn in growth was described as a downside risk to the inflation path. The article was produced using an AI tool and checked by an editor.
Trading And Risk Positioning
The sudden energy shock has significantly altered the inflation picture, and we need to adjust our positions accordingly. Euro area inflation has already hit 3.0% in April, a sharp rise from 1.9% in February, driven almost entirely by fuel costs. The latest Eurostat flash estimate confirmed energy prices surged 15% year-on-year, showing how quickly this is feeding through the economy.
This development makes it much harder for the European Central Bank to consider rate cuts in the near term. We should therefore look at unwinding bets on monetary easing and consider positions that profit from a more hawkish ECB, such as paying fixed on interest rate swaps. Looking back, we remember how central banks were forced into aggressive hiking cycles in 2022 when inflation proved stickier than first anticipated.
With inflation now forecast to peak around 3.5% in early 2027, we should anticipate rising demand for inflation protection. We have already seen the 5-year, 5-year forward inflation swap, a key market gauge of long-term expectations, climb to 2.4% in response to the latest data. This indicates the market is beginning to reprice for a period of more persistent inflation, presenting an opportunity for us.
Underlying structural factors like tight labour markets from an ageing population and German fiscal support will likely keep price pressures firm. The elevated geopolitical uncertainty also suggests we should prepare for higher market volatility in the coming weeks. We can use options on the VSTOXX index to position for an increase in price swings across European markets.
However, we must watch for signs that high energy prices are tipping the economy into a downturn, as this would be a significant downside risk to the inflation outlook. A sharp drop in the upcoming flash PMI manufacturing survey, for instance, would suggest that demand destruction is taking hold. This would force us to quickly reassess our view on persistent price pressures.
